China feeds bubble in rush to grow
Is the government stepping too hard on the gas pedal?
ISSAKU HARADA, Nikkei staff writer
BEIJING -- The Chinese economy logged faster real growth in the January-March period of 2017, the government reports, thanks to a public investment push and higher real estate sales. But the engines powering the expansion carry risks of an asset bubble.
Gross domestic product rose 6.9% on the year in preliminary estimates to mark a second quarter of accelerating growth.
Investment in infrastructure projects, such as roads and airports, soared 23.5%. "Regional government officials and bureaucrats upped their investments in order to score points with economic growth" before the Communist Party reshuffles its leadership this autumn, a party-affiliated source said.
Government spending rose 21% for the quarter. Sales of heavy construction equipment nearly doubled to 40,000 units, and the rise in demand spread to other industries as well.
A China office of a major Japanese steelmaker reportedly got a call this spring from the head of procurement at a Chinese construction company, offering to buy steel even if it were a little pricey.
The supply-demand gap for Chinese steel has narrowed sharply as the nation seeks to cut excess output capacity just as regional governments step up spending on infrastructure. Prices have climbed 20-30% since last summer. Crude steel output rose 4.6% on the year for the quarter, more than the 1.2% growth seen for all of 2016. But some Chinese companies still struggle to meet demand.
"This has never happened before," an executive at a Japanese steelmaker marveled.
Real estate was the other major growth driver. Development investment grew 9.1% for the first quarter, faster than the 6.9% for all of 2016. The floor space of commercial buildings sold shot up 19.5%.
Beijing has tightened restrictions on investing abroad since late last year in an effort to combat capital flight. Now money is no longer flowing out but is returning to settle in domestic real estate, said finance professor Chen Zhiwu of Yale University.
Real estate investment contributed around 10% of China's growth in the first quarter, show figures from the National Bureau of Statistics. When associated spending on such durable goods as furniture and appliances is factored in, the real contribution was likely bigger.
Growth driven by infrastructure spending and real estate has major side effects. For one, apartment prices in Beijing, Shanghai and Shenzhen have apparently topped those seen in Tokyo in the days of the bubble economy.
And if China slows its reductions to excess steel production capacity to meet current demand, it leaves the risk of oversupply problems re-emerging later.
While nominal GDP grew 1.9 trillion yuan ($276 billion) on the year last quarter, its deep debt also solidified. Household and corporate debt grew by 6.9 trillion yuan -- 3.6 times the GDP figure.
More than half of small and midsize businesses are in difficult financial straits, according to a March survey by the statistics bureau. Bond defaults remain high as well. Small and midsize banks, forced to take on more short-term debt, are also investing more in medium- and long-term bonds and financial products.
Premier Li Keqiang spoke of financial risks in his annual Report on the Work of the Government last month. The People's Bank of China has also pared back its heavy monetary easing and has been raising short-term interest rates. The one-year lending rate now stands 1.5 percentage points above where it was in early 2016. The central bank has also tended to tighten liquidity in the market.